Fitch Affirms MHFI's IDR at 'BBB+'; Outlook Stable

February 01, 2016 02:31 PM Eastern Standard Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed McGraw Hill Financial Inc.'s (MHFI) Long-term
Issuer Default Rating (IDR) at 'BBB+'. In addition, Fitch has affirmed
the individual issue ratings at 'BBB+' and short-term ratings at 'F2'. A
full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Diversification: Fitch Ratings recognizes MHFI's diversification, with
more than half of revenues and EBITDA coming from outside the ratings
business. The diversification and strength of those other businesses
provide MHFI with the flexibility to absorb negative performance or
changes in the S&P Ratings business.

Business Realignment: In September 2015, MHFI completed the acquisition
of SNL Financial (SNL) for approximately $2.225 billion. The purchase
was funded with a mix of incremental debt and cash on hand. SNL's
ultimate cost will be partially offset by acquisition-related tax
benefits having an estimated present value of approximately $550
million. Fitch views the SNL transaction favorably from a strategic
standpoint as it will strengthen MHFI's operating profile, diversify its
revenue sources and provide compelling growth opportunities given
minimal product line overlap.

In October 2015, MHFI announced it was exploring strategic alternatives
for J.D. Power. MHFI did not disclose terms of any potential
transactions. Fitch notes that J.D. Power comprised approximately 6% of
fiscal year 2014 total sales. Fitch expects any sale proceeds will be
used for general corporate purposes.

Financial Flexibility: The company's liquidity position and financial
flexibility remain strong after the acquisition given the strength of
its businesses and expected FCF generation. Fitch believes MHFI has
significant financial flexibility following the resolution of legal and
regulatory matters relating to certain U.S. residential mortgage-backed
securities and U.S. collateralized debt obligations. MHFI recorded $1.6
billion in charges that have largely been paid. As of Sept. 2015, pro
forma for a J.D. Power disposition and a full year of SNL's EBITDA,
Fitch estimates MHFI had total leverage of approximately 1.6x and total
debt of $3.5 billion (nearest maturity is $400 million due in 2017).

Leverage Capacity Scenarios: Under various scenarios Fitch has modeled,
which include assumptions for acquisitions and capex, Fitch believes
gross leverage could temporarily exceed its rating tolerance of 2.5x and
maintain current ratings. Based on current leverage and EBITDA levels,
MHFI has approximately $2 billion in additional debt capacity at the
2.5x threshold. Although MHFI has stated they are targeting to maintain
investment grade ratings and balance sheet flexibility post the SNL
acquisition, they have not verbalized a total leverage target.

Capital Deployment: Fitch expects MHFI to continue to deploy free cash
flow (FCF) towards acquisitions and shareholder returns in the form of
dividends and share repurchases, and notes that the company's capital
allocation strategy and capital structure policy will remain key rating
considerations. Fitch expects FCF after dividends to range from $650
million to $800 million. Continued share repurchases during a period of
heightened risk of a material legal or regulatory payment could pressure
the ratings.

Positive Rating Triggers: A ratings upgrade may occur if the company's
business and operational profile remains in line with current
performance. The cumulative effect of acquisitions and share repurchases
on the credit profile continues to reflect a conservative balance sheet
and financial policy, which may include sustained leverage under 1.5x.

Negative Rating Triggers: Ratings may be downgraded if leverage is
driven beyond 2.5x and if Fitch believes that such elevated leverage
will be maintained. Also, ratings would be pressured in the event of a
material disruption, negative operating results or business model
changes at the S&P Ratings business that materially affected margins and
FCF.

LIQUIDITY

Strong Liquidity: MHFI has historically maintained, and is expected to
continue to maintain, strong liquidity given the strength of its
business units and expected FCF generation. As of Sept. 2015 the company
had $1.4 billion in cash ($144 million held in the U.S.) and full
availability under its $1.2 billion CP program (backed by its $1.2
billion credit facility due June 2020).

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